The problem with politics is politicians...or is it the other way around ? Whatever it is, it prevents people from thinking clearly. To see politics at work, you don't have to look any further than our muddled, bureaucratic nightmare of a tax code. The last I heard, it was about 67,000 pages long, and it is filled with all sorts of arcane rules, tax credits, exemptions, etc. It seems politicians have been talking forever about making the tax code simpler, but it only gets bigger and more complicated every year.
Much political debate centers around marginal tax rates. How much the wealthy should pay is the hot topic these days, but I'd like to present a different angle on taxes. I propose that we get rid of ALL tax credits and exemptions, and replace it with a flat income tax rate. Obviously, I didn't think of this idea. It has been proposed before, but the more I think about it, the more I like it. Here's why.
Before I could endorse a flat tax (with a couple twists), I checked to see what the flat rate would have to be in order to meet or exceed current federal income tax revenue. That meant I had to find the total wages paid to American workers. I had a lot of trouble finding that number. I thought I'd find it at the Bureau Of Labor Statistics, but after looking at a half dozen or so wage graphs, the number still eluded me. I finally found a number at www.tax.com. That source indicated total reported wages paid to workers is about $6 trillion. I'm going to use that number. I hope it's accurate.
According to www.usgovernmentrevenue.com, total federal income tax revenue in 2010 came to $1.090 trillion. We'll round it to $1.1 trillion. That means a flat tax rate of 20% would produce federal revenue of $1.2 trillion, netting us an extra $100 billion toward reducing the deficit (forgive my static tax analysis. It's all I can do). It's important to remember that our unemployment rate is sky high right now. Officially, it's 9.1%, and in reality it's at least 17%. If we could get unemployment back into the 5% range, as it was before the recession, I figure we'd net another $400 billion in federal revenue. That's would be a $500 billion deficit reduction already, and the flat tax would help in that area. The $1.1 trillion we collect in federal income taxes currently includes business income taxes, which are currently taxed at a maximum rate of 35%. Corporations on average pay about 25%. A 20% flat tax would give give businesses a significant tax cut, which will stimulate job creation, helping us to get unemployment back to the desired 5% range.
I said there would be twists to my flat tax, and here's the first one. For high income wage earners, I do believe it's justifiable to say they should pay a little more to assist in helping the poor and disabled. To this end, any individual (business income is excluded) earning $250,000 or more would pay a flat tax rate of 30%. This would raise yet more revenue for the government and cut further into the deficit. According to factcheck.org, 2% of American households earn over $250,000, and their earnings comprise 24% of all income. Therefore, the extra 10% flat tax surcharge for these folks will raise an additional $144 billion in tax revenue ($6 trillion x .24 x. 10). Oh wait. No, it won't. I have to exclude the business income from that number. I'm not sure how much that will reduce revenue. My best guess is 25%, meaning the 10% surcharge. will raise an additional $108 billion or so.
So far, I've raised revenue by $608 billion, once unemployment returns to the 5% range.
I have one more twist. You probably noticed I would be taxing all income earners at the 20% rate, which would include very low income earners who need a break. So, I'll lower the flat tax rate to 10% for those earning less than twice the poverty rate (about $25,000 per year). This group represents about 47% of all wage earners. According to data I've read, this group earns about 13% of all income, so reducing their flat tax rate will reduce government revenue by approximately $80 billion ($6 trillion x .13 x .20 x .5).
My net figure from the 10-20-30% tri-level flat tax results in $528 billion more in federal revenue after unemployment returns to the 5% range. With unemployment at 9.1%, it still results in an extra $128 billion in federal revenue this year, increasing revenue by about the amount of the Bush tax cuts.
There will be objections to this type of plan from both the left and the right.
The left will hate the fact that the bottom 47% of wage earners, who currently pay no income tax, would now be paying 10%. Sorry, but no more free rides. We're in a debt crisis AND a jobs crisis, and we must climb out.
The right will hate the fact that this plan raises taxes at all. Again, sorry, but we're in a debt crisis AND a jobs crisis, and we must climb out. I'd prefer that these tax rates were lower myself, but that won't happen until government spending is reigned in. Spending is the lion's share of the problem, but fixing the tax code would be a good start.
Personally, I like the business tax cuts to stimulate job creation. I was tempted to make the business rates even lower to stimulate more jobs, but I figure I've already made liberals mad enough by reducing corporate tax rates, and by reducing rates for the wealthy to 30% (but remember liberals, the wealthy won't get any more deductions. They will actually have to pay that 30%, unlike now. I believe my flat tax structure would result in the wealthy paying more in taxes than they do currently).
But what really sold me on this tri-level flat tax is the effect it would have on politics. It DE-POLITICIZES the tax code. There would be no more tax breaks for this group or that group. That will reduce the influence of lobbyists and special interests, leading to less corruption. Exxon doesn't get it's tax credits ('hurrah !' says the left), and neither does anyone else. People won't get tax credits for NOT working ('hurrah !' says the right). As a result, politicians wouldn't have as much opportunity to pander. Hopefully, that would make them more honest. The 67,000 page tax code could be thrown out the window and rewritten into something much shorter, more sensible, and understandable. Of course, we'd have to prevent the politicians from changing the tax code after it was implemented, and we'd have to prevent them from exempting their buddies from having to pay the taxes. Perhaps a constitutional amendment stating that the rates could never exceed the 10-20-30% maximums except in cases of national emergency, and also stating that all taxes must be applied universally ??? Hey, as long as I'm dreaming, I may as well dream big.
P.S. - In an ideal world, everyone would be taxed at the same low rate (I seem to remember something about equal protection under the law, among other concepts) after making some provisions for the poor and disabled, but we don't live in an ideal world. We live in a politicized world, and I'm trying to come up with something that might have a snowball's chance of being implemented. This was the best compromise I could think of that would reduce the deficit some while stile having a beneficial economic effect. It's hard to raise any taxes without having some negative effect, and I'd rather not do it, but, like I said, this is a compromise...something the Republicans and Democrats just failed to accomplish.
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